Spring 2006 Industry Study Final Report Land Combat Systems Industry The Industrial College of the Armed Forces National Defense University Fort McNair, Washington DC, 20319-5062 i LAND COMBAT SYSTEMS 2006 ABSTRACT: Operation Iraqi Freedom (OIF) is proving--once again--the relevance of robust Land Combat Systems (LCS) to the success of our nation's war efforts and the survivability of our troops. Most of today's land combat systems are working well in missions for which they were not originally envisioned. Still, the LCS industry is undergoing notable change in multiple areas. First, systems like the Future Combat System (FCS) show the changing approach within the industry toward high technology, software-intensive, and networked systems of systems. Second, globalization is impacting the LCS industry, just as it does other economic sectors. The DoD needs to decide whether to fight or embrace globalization. Finally, the proliferation of partnerships, and other mechanisms, illustrate the struggle of industry players to maintain their relevance, and the DoD's struggle to maintain a healthy LCS industrial base. This year, the study team devotes considerable report space to providing field study observations, findings, and recommendations for bolstering the industry. Overall, the study team found the LCS industry to be in good shape, but not without opportunities for significant improvement. Mr. Lance R. Alderman, Dept of the Navy COL James E. Cashwell, US Army Col Kirk W. Hymes, US Marine Corps COL Gary L. Keck, US Army Ms. Susan C. Kinney, HQ USMC Ms. Margaret A. Kulungowski, Dept of the Army Lt Col Didi Kuo, US Air Force COL Bruce D. Lewis, US Army Mr. Cliff Messman, Dept of the Army COL Mikko Myllykangas, Finnish Defence Forces B.G. Hamdy Hamed Osman, Egyptian Armed Forces Lt Col Duke Z. Richardson, US Air Force LtCol Joseph Rutledge, US Marine Corps Ms. Angie Sawyer, Dept of the Army Ms. Vinita J. Veneziano-Martin, Dept of the Air Force COL Richard Shipe, US Army, Faculty COL Steve Brooks, US Army, Faculty Col Anne McGee, US Air Force, Faculty ii PLACES VISITED Domestic US Marine Corps Systems Command (MARCORSYSCOM), Woodbridge, VA Expeditionary Fighting Vehicle (EFV) Program Management Office, Woodbridge, VA Anniston Army Depot (ANAD), Anniston, AL General Dynamics Land Systems (GDLS), Stryker Plant, Anniston, AL Aberdeen Test Center, Aberdeen Proving Grounds, MD BAE Systems, York, PA Raytheon Space and Airborne Systems (SAS), El Segundo, CA Boeing, Huntington Beach, CA US Army Tank-Automotive and Armaments Command (TACOM), Warren, MI General Purpose Vehicles (GPV), New Haven, MI MTU Detroit Diesel, Detroit, MI General Dynamics Land Systems (GDLS) Headquarters, Sterling Heights, MI Joint Systems Manufacturing Center (Lima Tank Plant), Lima, OH Allison Transmission, Indianapolis, IN AM General, South Bend, IN International Bumar, Warsaw, Poland Wojskowe Zaklady Mechaniczne Siemianowic Slaskich (WZMS), Siemianowice, Slaskie Steyr-Daimler-Puch Spezialfahrzeug (SDP SF), Vienna, Austria MAN Sonderfahrzeuge AG, Vienna, Austria Krauss-Maffei Wegmann (KMW), Munich, Germany Oto Melara, La Spezia, Italy Iveco Defense Vehicles Division, Bolzano, Italy 1 INTRODUCTION The viability of the industrial base is inseparable from the national security of the United States (US). Private industry provides the skills, facilities, and technology to support the land combat systems (LCS) that give our US military undeniable power. If we accept these premises, then it is clear the Department of Defense (DoD) must actively manage (i.e., regulate) the LCS industry to ensure it remains responsive to changing threats, while simultaneously able to support future DoD warfighting strategies. To that end, this report represents the findings of a three- month study aimed at assessing the capabilities, health, and areas for improvement of the US-- and to a smaller degree the European--LCS industry. This report is the next in a series of annual reports on the LCS industry chartered by the Industrial College of the Armed Forces (ICAF), located at Fort Lesley J. McNair, Washington DC. This year's report devotes considerable space to field study observations, findings, and recommendations for bolstering the industry. The study team--comprised of eighteen US and international military, and DoD civilian employees-- included members from every US service, as well as Finland and Egypt. This coalition-joint make-up challenged the team to avoid parochial interests and international boundaries. The study team employed the standard process for ultimately reaching its observations and findings. This process involved literature review, domestic field visits, European field visits, comparative analysis, and finally, group consensus of the reported results. The products from the study team's efforts include a series of white papers, this report, and a summary briefing to senior DoD officials. Any shortcomings are a reflection of the compressed schedule or the study team's understanding, and not the US and European industry participants, each whom provided candid comments about the industry and open access to their capabilities and facilities. Our intent here is to demonstrate that while the overall LCS industry is in good health, due in part to high demand stemming from current operations and the DoD's transformation efforts, significant opportunities exist for improvement, to include initiatives both in the US and Europe. We'll start by offering a short historical background, followed by a precise definition of what we mean by "LCS industry." Second, because one characteristic of the LCS industry is that it is highly regulated, we must explain the US government's goals and roles within the industry. Third, we'll examine current conditions within the industry using Porter's classic "Five Forces" model as a framework (1980). Fourth, we'll discuss the more prominent industry challenges and opportunities. Fifth, we devote the final third of the paper to observations, findings, and recommendations that the study team hopes will initiate a broader discussion between congressional, DoD, and industry leadership on initiatives for LCS industry improvement. HISTORICAL PERSPECTIVE The 1990’s were a challenging period for the defense business, as the demand for land combat systems declined along with shrinking defense budgets. This led industry partners to seek consolidations, eliminate personnel, and improve processes wherever possible in order to maintain profitability. The end result was a reduced number of suppliers available in the LCS marketplace, and even these remaining suppliers suffered from excess capacity. Conditions began to change in 1999, when the Army set a course for transformation with its vision of the Future Combat System (FCS) designed to network forces in order to provide superior mobility, battle space awareness, enhanced lethality, and survivability. The Global War on Terror (GWOT) brought further change in 2001, later manifested in Operation Enduring Freedom 2 (OEF) and Operation Iraqi Freedom (OIF). These current operations, the larger GWOT, and the push to transform, significantly raised the tide for the LCS industry and improved the market environment for competitors. It is this environment in which we find ourselves today. THE INDUSTRY DEFINED Before engaging in meaningful analyses of the industry, we must first define what we mean by "LCS industry," and then place boundaries on that part of the LCS industry reviewed by the study team. The LCS industry--itself a subset of the overarching defense industry--contains multiple elements, to include combat and tactical vehicles, sensors, networks, small arms, clothing, ammunition, bridging systems, and so forth (i.e., virtually anything that supports the Soldier or Marine in peace and war). While all these subsets contribute to the fight, and are important in their own right, this year's study focused only on the combat vehicles and systems sector, and to a lesser degree on the tactical wheeled vehicles sector. Hence, for our purposes here, when we use the term "LCS industry," we use it loosely to refer to just these two sectors. Throughout this report, we will refer to further breakouts within these two sectors. Hence, we must be able to mentally sort the industry in multiple ways. The tables below show three sorting taxonomies, along with their generally recognized delineations. LCS Industry Sorting Taxonomies Sort by Size Sort by Purpose Sort by Work Breakdown Structure Light (0 - 20 Ton) Tactical Wheeled Vehicles Lower tier vendors and materials (trucks and utility vehicles) Medium (20 - 40 Ton) Wheeled Combat Vehicles First tier sub-system providers (e.g., engines, transmissions) Heavy ( > 40 Ton) Tracked Combat Vehicles Vehicle system providers Lead System Integrators (LSI) The Lead System Integrator (LSI) is a new concept for the LCS industry, and stems from the aforementioned Army flagship program, FCS, which consists of 18 separate systems, plus an integrating network, plus the Soldier for which FCS exists (i.e., this is the genesis of the often cited "18+1+1" phrase). The LSI is the contractor (Boeing in the case of FCS) charged with making the system of systems work as one--no small task. The rest of the categories are self- explanatory, but we must make several points before moving on. First, because the US LCS industry is monopsonistic (i.e., the DoD is essentially the only customer), for industrial base reasons, the DoD must preserve (1) at least one sourcing option for each category in the above table, preferably a US source, and ideally (2) competition within each category in order to drive lower cost and innovation, even if it means looking at off-shore sources. Second, for any of the three sorting taxonomies in the above tables, as we move down a column, the reliance on commercial technologies diminishes. Reliance on commercial technologies has its pros and cons, and understanding the magnitude of reliance goes far in explaining both prime and vendor behaviors, and the DoD's strategies for preserving each category. GOVERNMENT: GOALS AND ROLES The US government plays a large role in the LCS industry because the government, in effect, is the industry hub.